Resources

FACT Sheet: Overview of US International Corporate Tax Law

Reviewing Changes under the TCJA

Prior to TCJA, US corporations owed tax on their foreign subsidiaries’ profits at the statutory rate (then 35%), but only when subsidiaries returned these profits to the US parent in the form of dividends. Hence most US multinationals kept their profits on the books of their foreign subsidiaries indefinitely to avoid US tax. That was the so-called worldwide system with deferral.

After TCJA, US corporations no longer pay tax on the dividends they receive from their foreign subsidiaries. That is the territorial exemption system. But it is only a hybrid territorial system because, as a partial measure to prevent profit shifting, the TCJA created the so-called Global Intangible Low-Taxed Income (GILTI), which encompasses most foreign income except for “routine profits.” Half of GILTI is subject to tax, effectively setting the tax rate on foreign profits at about 10.5%, half the 21% domestic rate.

The TCJA also created the:

  • Base Erosion and Anti-abuse Tax (BEAT) to deter profit shifting from US corporations to their foreign affiliates, and the
  • Foreign-Derived Intangible Income (FDII) deduction, a new tax break for export income derived from intangible assets like patents, trademarks and copyrights.

The following table outlines the various characteristics of the GILTI, BEAT and FDII under current law and shows how the No Tax Breaks for Outsourcing Act (sponsored by Sen. Sheldon Whitehouse and Rep. Lloyd Doggett and endorsed by the Americans for Tax Fairness and FACT coalitions), the Biden Plan, and the Wyden plan would modify them.

Comparing New International Tax Plans

Current Law and RationaleNo Tax Breaks for Outsourcing Act (endorsed by ATF and FACT)Biden PlanWyden Plan
GILTI rate50% of GILTI is exempted from taxation
(so GILTI is taxed at half the 21% domestic rate)

This rate is too low; it is a giveaway to multinationals’ shareholders
0% of GILTI is exempted
(so GILTI is taxed at domestic rate, currently 21%, but ATF wants it to be raised to 28%)

The reduced rate for foreign profits harms workers and domestic businesses
25% of GILTI is exempted
so GILTI is taxed at 21% (¾ of Biden proposed 28% domestic corporate rate)
Options remain on the table: 0% or some percentage of GILTI exempted, depending on where corporate tax rate and other provisions end up to be
GILTI exemption for “routine profits” (“Qualified Business Asset Investments” or “QBAI”)Routine profits are exempted and deemed to be equal to 10% of foreign tangible assets

The rationale is to target highly mobile intangible profits above the normal returns to tangible capital because intangible profits are more mobile and hence easier to shift to tax havens
No exemption for routine profits

The exemption of routine profits creates a perverse incentive to increase foreign investment in tangible assets (i.e., plants) at the expense of domestic investment
No exemption for routine profitsNo exemption for routine profits
GILTI blending of foreign tax creditGlobal blending (so foreign taxes paid to countries with rates above the GILTI rate compensate lack of taxes paid to tax havens)

Global blending may be somewhat easier administratively
Jurisdictional (“per country”) blending (taxes paid to a foreign country is credited against GILTI tax only on income derived from that country)

Global blending creates a strong incentive to shift profits from countries with rates above the GILTI to tax havens; per-country GILTI eliminates that incentive
Jurisdictional (“per country”) blendingEither jurisdictional blending
Or blending in two buckets of countries (those with higher rates and those with lower rates than GILTI)
GILTI treatment of foreign tax credits80% of foreign taxes paid are credited against GILTI tax

This is the one aspect of TCJA that is less favorable to multinationals than NTBOA. The rationale is dubious.
100% of foreign taxes paid are credited against GILTI tax

The partial credit creates administrative complexity; giving a full credit for foreign taxes paid is standard and respects other country’s legitimate need for tax revenues
80% of foreign taxes are credited against GILTI tax?
Eliminate the requirement to allocate share of US expenses like management and R&D to foreign income

This rule that pre-existed TCJA means R&D and management functions are not subsidized to benefit foreign income.
FDIIReduced tax rate for income (above routine profits) derived from exports

The FDII is a tax break for US-based exporters of goods and services with high profit margins, which is meant to repatriate intellectual property.
Eliminate FDII

This tax break increases when tangible investment in the United States decreases, which is an incentive to shift jobs offshore.
Tax incentives aiming at intellectual property have a poor record at attracting actual research activities.
FDII is currently under review by the OECD as a harmful tax practice and may violate WTO rules.
Eliminate FDII but spend as much on new, unspecified tax incentives for R&DThoroughly reform FDII by:
Redefining its base as income equal to a share of R&D expenses for activities carried out in the United States

Equalizing FDII and GILTI rates
ScopeAll US corporations are subject to GILTI and FDIIAll US corporations are subject to GILTIAll US corporations are subject to GILTIAll US corporations are subject to GILTI and FDII
Oil & gas industryOil and gas industries are exempted from GILTIEliminates exemption for oil and gas corporationsAll tax incentives for oil and gas industry are eliminatedNot addressed
Anti-inversion provisionsWeak anti-inversion provisionCorporations effectively managed from the United States or 50% owned by US residents are taxed like US corporations

A higher GILTI rate increases the incentive to invert, hence the need for stronger anti-inversion rules
Corporations effectively managed from the United States or 50% owned by pre-inversion shareholders are taxed like US corporationsNot addressed
Earnings strippingNo additional provision to counter profit shifting by manipulating interest rates on loans between related subsidiaries

The GILTI and BEAT are meant to disincentivize all forms of profit shifting
Limit deduction for interest payments to related parties

The NTBOA does not touch on the BEAT, but this is an alternative way to reduce one of the main sources of base eroding payments
Not addressedNot addressed

Current Law and RationaleFACT / ATF PositionsBiden PlanWyden Plan
BEATTax on certain base-eroding payments (e.g., interest, royalties) to foreign related corporations.Same as Biden planReplace BEAT with SHIELD, a new anti-base erosion tax modeled after the OECD proposal, which would apply only to base-eroding payments to related entities in countries that are not participating in the global agreement (GloBE).Keep BEAT but amend it to preserve value of domestic tax credits; if revenue allows, foreign tax credits as well
BEAT rate10% (12.5% in 2026 and beyond)Same as Biden planThe rate would be the difference between the taxpayer’s effective tax rate in the payment’s recipient country and the GloBE rate (or the GILTI rate in the absence of a GloBE agreement)Increase rate on base eroding payments
BEAT scopeOnly US corporations with annual revenue above $500m are subject to the BEATNot addressedNot addressedNot addressed
BEAT exemption thresholdOnly corporations that make more than 3% of their total deductible payments to foreign affiliates are subject to the BEATSame as Biden planDelete exemption thresholdNot addressed

BEAT exclusion of Cost of Goods Sold
Interests and royalties that are reflected in the cost of goods sold are not subject to the BEATSame as Biden planInclude cost of goods sold in SHIELD baseNot addressed

For easy-to-read blogs on TCJA’s international tax provisions, see:

For further resources on the individual provisions in the TCJA, see the following resources from the Tax Policy Center: